Everyone Who Thinks Facebook Is Stupid To Buy WhatsApp For $US19 Billion Should Think Again...

Mark Zuckerberg

Facebook made a breathtaking move yesterday, buying messaging app WhatsApp for $US19 billion.

Even for Facebook, that’s a staggering amount to pay for a company with estimated 2013 revenue of only $US20 million. It represents almost 10% of Facebook’s overall value — for a “messaging app.”

So in the wake of the announcement, the usual chorus of keyboard pundits took to Twitter to snicker together and pronounce Facebook and its CEO, Mark Zuckerberg, braindead.

But Facebook buying WhatsApp for $US19 billion isn’t braindead.

It’s just bold.

Very bold.

Like other bold moves, Facebook’s WhatsApp deal could end up looking brilliant.

Or moronic.

That’s what makes it bold.

If it were guaranteed to end up looking brilliant, it wouldn’t be bold. It would be obvious.

I don’t know how Facebook’s WhatsApp deal will end up looking — and neither, it’s worth noting, do any of the pundits who are pronouncing it braindead. Based on everything I do know, though, I think the odds are that it will end up looking brilliant.

Here’s why:

  • WhatsApp has both offensive and defensive value to Facebook. WhatsApp is the fastest-growing company in history (in terms of users). If the company’s growth continues, and it can continue to “monetise” its users, it will be worth an even more mind-boggling amount of money someday. At the same time, WhatsApp’s growth is gobbling up user messaging and connection time that once could have belonged to Facebook. Now those users and their time do belong to Facebook. So buying WhatsApp allows Facebook to both own “the next Facebook” and prevent “the next Facebook” from eating Facebook’s lunch.
  • WhatsApp’s growth and usage is absolutely mind-boggling. Five years after its founding, the company has 450 million active monthly users, of which a staggering ~315 million use it every day. WhatsApp is adding 1 million new users a day — 1 million! Facebook thinks WhatsApp could have 1 billion users in a few years, and this estimate seems conservative. (Facebook itself only has 1.2 billion users.) WhatsApp also does a lot more than “text-messaging.” It allows users to send photos, videos, and voicemails to each other. In short, it allows users to do a lot of what Facebook does. So, again, Facebook really does appear to be buying “the next Facebook.”
  • WhatsApp already has a powerful revenue model, and other successful messaging apps are showing the potential for it to add many more. WhatsApp ostensibly charges its users $US1 per year after the first year. (“Ostensibly” because I’ve never heard of anyone actually paying this $US1). Assuming most current users end up paying the $US1/year, that’s a potential revenue stream of several hundred million dollars a year from WhatsApp’s current revenue model alone. Meanwhile, other messaging apps like Line and WeChat have demonstrated the power of “stickers,” user-to-user payments, ecommerce, and other revenue streams. When you have as many users as WhatsApp, generating even only a few dollars per year per user creates a massive business.
  • WhatsApp has very low costs, so it should eventually be wildly profitable. WhatsApp currently has only 55 employees. Assuming an all-in cost of $US200,000 per employee, that’s a total cost base of $US11 million. Let’s assume WhatsApp grows to, say, 300 employees over the next few years. Then it will have a cost base of only $US50-$75 million. Meanwhile, if the company’s growth trajectory continues, it could easily be pulling in more than $US1 billion a year of revenue in a few years. Almost all of that would be profit.
  • The names of all the smart people who pronounced Facebook itself a “fad” or “worthless” and dissed every new investment in the company as “moronic” could fill a book. Most people have consistently underestimated the power, growth potential, and value of the leading social platforms, including Facebook. Facebook’s $US1 billion acquisition of Instagram, for example, which was then a revenue-less company with 13 employees, was seen as proof that Mark Zuckerberg was a clueless kid who had no business running a major company. Meanwhile, Facebook is now valued at $US175 billion, and Instagram is considered one of the smartest pre-emptive acquisitions in history. $US19 billion for WhatsApp is a much bolder bet than Instagram, but it, too, could end up looking a lot smarter than most people think.

Yes, but is WhatsApp really worth $US19 billion?

The short answer is “no one knows.” There are some financial scenarios in which WhatsApp could end up being “worth” (in a limited financial sense) a lot more than $US19 billion. There are other scenarios in which it could end up being worth a lot less. The only answerable question right now is whether WhatsApp was worth $US19 billion to Facebook.

And I think the answer is yes.

The bottom line:

This is a very bold move.

Like other bold moves, it might end up looking stupid, but it also might end up looking brilliant.

It’s also a long-term move, a bet on what the future will look like 5-10 years from now, not next quarter.

In that way, this deal is a vintage Mark Zuckerberg move.

Zuckerberg continues to be one of the few CEOs (Jeff Bezos is another) who is willing to sacrifice near-term earnings and expose himself to short-term ridicule in order to make bold long-term bets. This approach has worked out great for Amazon. And it has worked out great for Facebook so far.

In short, Facebook buying WhatsApp for $US19 billion isn’t stupid. It’s just bold.

NOW WATCH: Tech Insider videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.